How to Start a Startup: How to Raise Money

Marc Andreessen says that, as a founder, raising venture capital is going to be one of the easiest things you do for your company. But considering being a founder is a really demanding job, even the easiest part is no picnic.

As part of his How to Start a Startup course at Stanford University, Y Combinator president Sam Altman moderated a panel featuring three big names in startup fundraising to talk about everything from the big picture down to the nitty gritty details of asking people for money to support your next venture. The panel included:

Fundraising Stages

When we talk about fundraising, we’re not talking about selling Girl Scout cookies. Whether you’re knocking on the door of Silicon Valley venture capital firms or amping for Demo Day at YC, raising money in the startup game comes in stages:

Seed Stage

This is your initial capital used to conduct research, get patents, and generally get all the ducks in a row that you probably couldn’t without cash flow. This will help you build a strong foundation for the next stage.

Series A (Venture)

With your product more streamlined and most of the company ownership still under your belt, this next phase will help you expand and hire a larger team.

Series B and C (Second and Third Stage)

This is a continuation of your startup financing and quest for external funds. With each round, you should be continuing to improve your product, and your pitch will follow.

After these stages, your road may take you to the bank, an IPO, or acquisition, but we’ll save that for a future post. Right now, we’re going to tap into what these successful gentlemen have to say about the Seed and Series A stages of getting funded.

Have a Good Product

Your product should be so good that you don’t even need to raise money. After pitching to VC firms all up and down Silicon Valley, Conrad was given the advice to “be like the Twitter guys.” That is to say, have a product so good that you don’t even need a killer pitch. Your idea can initially sustain itself without all the cash.

In fact, that’s a trait that first attracted Conrad to the idea of Zenefits. And it turns out, that’s an attractive trait to investors as well.

If you know your product so well that it’s lean, smart and self-sufficient, then you’ve created something with momentum that’s not dependent on cash. That’s the kind of product confidence and direction that investors look for. As Andreessen put it, “You’re always better off making your business better than you are making your pitch better.”

The entire panel agreed that they look for the outliers — the ones whose ideas seem nuts at first (i.e. Airbnb), but they stand out as something “so crazy it just might work.” Crazy, but not without a plan of course.

Understand Your Risks

Andreessen learned from Andy Rachleff the “onion theory risk.” The idea is basically that, as a startup (especially before Seed funding), you are just layer upon layer of risk. Even after you get your first round of funding, it’s not the money that makes those risks go away, it’s what you do with it.

As you make smart decisions with your capital like finding a co-founder that’s as good or better than you and conducting more research and gathering more data, you’re achieving milestones in your business. And with each milestone, you’re peeling away a layer of risk.

Because you’re starting out with so much risk, early investors (Seed and Series A) are going to be more focused on attaining a percentage of ownership rather than something monetary.

With that in mind, it’s also important to manage the amount of equity you’re giving away, so that you don’t end up with only a sliver of ownership for yourself. Andreessen sees this as a big deterrent for investors in later stages because, for a founder with little stake in the company, the drive and ambition can quickly fizzle.

Cover Your Bases

Conway broke down some technical aspects of working with investors that are obvious, yet can be easily overlooked (especially by first-time entrepreneurs).

Sum up your product in one sentence.

This is not only good for refining your own vision of the product, it’s also a way to quickly and efficiently paint a picture of the product for an angel investor … or whoever is listening.

Don’t procrastinate.

Things move fast in the startup world. In fact, every week Conway and the team at SV Angel look at about 30 companies and only invest in one on average. Procrastinating (especially going into fundraising) can be a huge detriment when your cash competitors are going full speed and staying nimble.

Get it in writing.

After any important decision is made, you should send an email to the investor right away outlining what was discussed to make sure that both parties are on the same page. Conway says, this small, simple step can eliminate a lot of potential controversy down the road.

Take-Home Message

Don’t ever let funding determine a milestone or a starting point. In fact the more you can do without it, the better. If you can create a unique product with as little funding and resources as possible, investors will be even more inclined to see what you can do with the additional resource of their money.

Next Steps

You can read a full transcript of the investment panel with Andreessen, Conway, and Conrad here.

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